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Irish bank debt deal breaks deposit taboo

Never has so much joy emanated from a statement by a Central Bank governor that he “notes” something, but so it is with the unwinding of the Irish Central Bank’s Emergency Liquidity Assistance to Anglo Irish Bank and the consequent refinancing arrangements, as not vetoed by the ECB (hence the importance of that noticing by Mario Draghi). But amid the clear improvement in Ireland’s fiscal sustainability, one aspect of the deal has not yet gotten much attention: it almost certainly imposes a haircut on some bank depositors.

Haircutting deposits has so far been off-limiits for Eurozone governments, and it was the entanglement of depositor preference with senior unsecured debt which formed a major link in the bank-sovereigns “doom loop” since such debt was also considered too hot to touch.

Anyway, since the clear effect of the special liquidation of Anglo’s successor entity (IBRC) is to insert NAMA as a preferred creditor in bankruptcy, any depositor who can’t be covered by deposit insurance (up to €100,000) or the Eligible Liabilities Guarantee (ELG) scheme ends up as just another creditor in the queue for the carcass of the bank. In case you’re wondering, ELG was the more standard replacement for Ireland’s original bank guarantee scheme, it only covers newly issued liabilities (not blanket ones, like the original), and there are some limitations on term. Specifically –

What deposits are covered under the ELG Scheme?

Eligible liabilities which may be guaranteed under the ELG Scheme must have been taken out with Anglo Irish Bank after 28 January 2010 or with the Irish Nationwide Building Society after 3 February 2010 and with an initial maturity under five years.

And what is the specific profile of a depositor who might not be covered under the insurance (DGS) or ELG schemes? –

A significant majority of the remaining deposits in IBRC are held by depositors who have connected loans with IBRC. The status of these deposits will be considered by the Special Liquidators in terms of the contractual arrangements applying to them. To the extent that they are legally entitled to do so and having regard to the arrangement in place between IBRC and customers on their date of appointment, the Special Liquidators will set off all existing deposits held as security for related lending against amounts due to the bank. If a deposit is not eligible under either the DGS or ELG scheme the depositor will be treated in the same way as other unsecured creditors.

The depositors likely to fall into this category are therefore long-standing clients who’ve also borrowed large amounts from the bank over the years and who because of specialized circumstances were not able to move the deposits from the bank despite its weak circumstances.